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ECON 001 Exam #3

Rule of 70
time to double almost equal to 70/growth rate (Sometimes Rule of 72)
The Rule of 70 is only an approximation for…
smaller growth rates (less than 10%)
Determinants of Growth
Labor Productivity (L), Capital Stock (K), Human Capital (H), Technology (A)
Things that Hinder Growth
War, Bad Government Policies
Potential GDP
Level of Y attained when all firms are operating with normal labor force under normal working hours (NO IDLE CAPITAL)
The Difference Between Stocks and Bonds
Companies must payoff bonds before dividends, but with bonds no ownership of the company
3 Roles of Financial System
Spreads Risk, Provides Liquidity, Provides Information
Explain How the Financial System Provides Liquidity
Makes it easier to get assets, Makes it easier to convert current assets to cash
Explain How the Financial System Provides Information
Prices (Stock prices are constantly updated)
Spr=Y-T-C Y=C+I+G
Spu=T-G I=Y-C-G
Proof that Savings = Investment
Suppose that in 2010, all prices in the economy double and that all wages and salaries have also doubled. In 2010, you
are no better off or worse off than you were in 2009 as the purchasing power of your salary has remained the same.
Suppose that at the beginning of a loan contract, the real interest rate is 4% and expected inflation is currently 6%. If actual inflation turns out to be 7% over the loan period, then
borrowers gain 1%
When actual inflation is less than expected inflation
borrowers lose and lenders gain
Technological advances generally result in
increased life expectancy
If real GDP per capita measure in 2000 dollars was $6,000 in 1950 and $48,000 in 2000, we would say that in the year 2000, the average American could buy ______ times as many goods and services as the average American in 1950.
If the growth rate of real GDP rises from 3% to 4% per year, then the number of years required to double real GDP will decrease from
23.3 years to 17.5 years
If real GDP grows by 3% in 2005, 3.2% in 2006, and 2.5% in 2007, what is the average annual growth rate of real GDP?
Actual real GDP will be above potential real GDP if
firms are producing above capacity
Increasing the amount of consumption spending and reducing the amount of savings ________ investment expenditures, and ________ long-run economic growth of the economy.
decreases, decreases
Liquidity refers to
the ease in which a financial security can be traded for cash
Borrowers are ________ of loanable funds, and lenders are _______ of loanable funds.
demanders, suppliers
Which of the following would you expect to increase the equilibrium interest rate?
an increase in the budget deficit
The response of investment spending to an increase in government spending is called
crowding out
How would the equilibrium quantity of loanable funds respond to a change from an income tax to a consumption tax?
The equilibrium quantity of loanable funds would rise.
During the expansion phase of the business cycles, which of the following eventually increases?
Production, Employment, Income
A period of expansion ends with a _______ and the period of recession ends with a ______
peak, trough
What is the name of the organization that defines business cycles peaks and troughs in the United States?
National Bureau of Economic Research
Purchase of diapers should
remain fairly consent over the business cycle
Inflation tends to _______ during the expansion phase of the business cycle and _______ during the recession phase of the business cycle.
increase, decrease
Since the 1950s,
U.S. business cycle fluctuations have become milder.
What is one role the financial system does not provide?
Creating Money
According to the “catch-up” theory, poorer countries ought to have _______ growth rates compared to their richer counterparts.
A constant increase in capital per worker cannot lead to long-run growth because capital per worker
exhibits decreasing marginal returns
What would be the result of a decrease in a government budget deficit?
a decrease in supply
What would be the result of an increase in taxes on business profits?
a decrease in demand
Suppose there is a financial crisis that reduces people’s retirement funds. Identify what happens to the interest rate and amount of lending.
a decrease in supply
Suppose our federal government decides to increase the amount of lending that it spends holding taxes constant. Identify what happens to the interest rate and amount of lending.
a decrease in supply
Durable Goods
goods lasting 3 years or longer
Non Durable Goods
goods lasting less than 3 years

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